Enterprise Risk Management
The Company and its subsidiaries, in global growth and expansion, require a comprehensive approach to corporate risk management that promotes extensive strategic thinking and analysis, while fundamentally integrating and maintaining highest ethical standards in the Company‚Äôs core values and beliefs.¬† Risk management will provide the organization with the superior capabilities to identify, assess and manage the risks and enable the organization and its employees, at all levels, to better understand and manage risks.
The Company and its subsidiaries are all in the quick-service restaurant sector.¬† Quick-service restaurants like those maintained by the Company are expected to maintain high quality in terms of food, service and cleanliness (‚ÄúFSC‚Äù).¬† The Company responds by observing stringent guidelines, processes and procedures in its FSC, and conducting regular and spot audits to ensure that FSC standards are maintained not only in stores but also in commissaries.¬† The Company has likewise instituted a system of incentives to reward excellent performance in terms of FSC by stores.
The Company‚Äôs directors and management periodically review the effectiveness of the Company‚Äôs risk management system.
Financial Risk Management
The Company‚Äôs principal financial instruments comprise cash and cash equivalents and receivables.¬† The main purpose of these financial instruments is to obtain financing for its operations.¬† The Company has other financial assets and liabilities such as other noncurrent assets and trade payables and other current liabilities which arise directly from its operations.
The main risks arising from these financial instruments are credit risk and liquidity risk.¬† The Company does not engage in any long-term debt and foreign currency-denominated transactions that may cause exposure to interest rate risk and foreign currency risk, respectively.¬† The policies for managing each of these risks are summarized as follows:
Equity Price Risk
The Company is not exposed to significant equity price risk on its investment in quoted equity securities consisting of investment in club shares and shares of public utility companies.
Interest Rate Risk
Interest rate risk arises from the possibility that the fair value or future cash flows of financial instruments will fluctuate because of changes in market interest rates.
The Company‚Äôs interest rate exposure management policy centers on reducing the Company‚Äôs overall interest expense and exposure to changes in the interest rates.
To manage the interest rate risk related to the Company‚Äôs long-term debt, the Company uses a derivative instrument to fix the interest rate over the term of the debt.
There is minimal exposure on the other sources of Company‚Äôs interest rate risk.¬† These other sources are from its cash in bank, short-term deposits, refundable deposits and employees‚Äô car plan receivables.
Foreign Currency Risk
The Company‚Äôs exposure to foreign currency risk arises from the Parent Company‚Äôs investments outside the Philippines, which are mainly in People‚Äôs Republic of China and United States of America.¬† While the foreign businesses have been rapidly growing, the net assets of foreign businesses account for only 10.84% and 15.57% of the consolidated net assets of the Company as at December 31, 2013 and 2012, respectively.¬† Therefore, the total exposure to foreign exchange risk of the Company is still not significant.
The Company also has transactional foreign currency exposures.¬† Such exposure arises from its Philippine operations‚Äôcash and cash equivalents, receivables and long-term debt in foreign currencies.
Credit risk is the risk that a customer or counterparty fails to fulfill its contractual obligations to the Company.¬† This includes risk of non-payment by borrowers and issuers, failed settlement of transactions and default on outstanding contracts.
The Company has a strict credit policy.¬† Its credit transactions are with franchisees that have gone through rigorous screening before granting them the franchise.¬† The credit terms are very short, while deposits and advance payments are also required before rendering the service or delivering the goods, thus, mitigating the possibility of non-collection.¬† In cases of non-collection, defaults of the debtors are not tolerated; the exposure is contained the moment a default occurs and transactions that will increase the Company‚Äôs exposure are not permitted.
The Company has no significant concentration of credit risk with counterparty. Its franchisee profile is such that no single franchisee accounts for more than 5% of its total system wide sales.
The Company‚Äôs exposure to liquidity risk refers to the risk that its financial liabilities are not serviced in a timely manner and that its working capital requirements and planned capital expenditures are not met.¬† To manage this exposure and to ensure sufficient liquidity levels, the Company closely monitors its cash flows.
On a weekly basis, the Company‚Äôs Cash and Banking Team monitors its collections, expenditures and any excess/deficiency in the working capital requirements, by preparing cash position reports that present actual and projected cash flows for the subsequent week.¬† Cash outflows resulting from major expenditures are planned so that money market placements are available in time with the planned major expenditure.¬† In addition, the Company has short-term cash deposits and has available credit lines with accredited banking institutions, in case there is a sudden deficiency.¬† The Company maintains a level of cash and cash equivalents deemed sufficient to finance the operations.
Capital includes equity attributable to equity holders of the Parent Company.
The primary objective of the Company‚Äôs capital management is to ensure that it maintains a strong credit rating and healthy capital ratios in order to support its business and maximize shareholder value.¬† The Company has sufficient capitalization.
The Company generates cash flows from operations sufficient to finance its organic growth.¬† It declares cash dividends representing about one-third of its consolidated net income, a ratio that would still leave some additional cash for future acquisitions.¬† If needed, the Company would borrow money for acquisitions of new businesses.